Quick answer
A business line of credit is a revolving limit you can draw on, repay and draw again, paying interest only on what you use. Unsecured lines are sized on turnover and bank statements; secured lines can be larger when backed by property. Once the limit is approved, drawing funds is usually very quick, which makes a line of credit one of the best ways to have fast money ready before an urgent need arrives.
Key points
- Draw, repay and redraw within an approved limit.
- Interest usually charged only on the amount drawn.
- Very fast to access once the limit is in place.
- Watch for line fees and a balance that never clears.
- Structure
- Revolving limit
- Security
- Unsecured, or property-backed for larger limits
- Speed
- Fast to draw once approved
- Purpose
- Business purposes only
The fastest business loan is the one that’s already approved. That’s the real advantage of a line of credit. Instead of applying when something goes wrong, you set up a limit while things are calm, and when an urgent cost lands, you draw on it in minutes rather than days.
Lines of credit suit businesses whose costs and income don’t line up neatly: seasonal trades, businesses waiting on customer payments, and anyone who regularly needs to buy stock or materials before getting paid.
How a business line of credit works
- A limit is approved, based on turnover and bank statements, or on property for larger limits.
- You draw what you need, when you need it, up to the limit.
- Interest is charged on the drawn balance, not the whole limit.
- You repay as cash comes in, and the available limit goes back up.
- Fees may apply to the limit itself, such as a monthly or annual line fee.
When a line of credit beats a term loan
| Situation | Line of credit | Term loan |
|---|---|---|
| Recurring stock purchases before sales | Good fit | Clunky; a new loan each time |
| Seasonal dips | Good fit | Repaying in the quiet season hurts |
| Waiting on customer invoices | Good fit | Possible, but less flexible |
| One-off purchase with a clear payback | Possible | Usually simpler and cheaper |
| Long-term asset | Poor fit | Better match |
Unsecured or property-backed?
Unsecured lines are quicker to set up and don’t put property at risk. The limit depends on turnover and the strength of the bank statements, and is usually modest.
Property-backed lines can offer larger limits and sometimes lower costs, but need a valuation, title checks and signatures like any secured loan. They suit established businesses with property that want a larger buffer.
Using a line of credit well
- Set it up before you need it. The approval takes time; the drawing doesn’t.
- Use it for short swings, not permanent debt.
- Check it monthly. If the balance hasn’t been near zero for months, consider converting part of it to a term loan.
- Know the fees, including line fees, drawing fees and any fees for exceeding the limit.
An illustrative example
A Cairns café and catering business has a big swing between the dry season and the wet. In the busy months it buys stock and pays casual staff weeks before catering clients pay. A $40,000 unsecured line of credit set up in the quiet season means that, when a large wedding order comes in with a short deadline, the owner can draw $15,000 for stock and staff that day and repay it when the client’s final invoice is paid.
What lenders check
- Six to twelve months of bank statements showing steady deposits.
- How often the account is overdrawn or has dishonours.
- Existing debts and their repayments.
- For property-backed lines, the property and its equity.
The cost of always being ready
A line of credit’s fees are the price of speed on standby. For a business that regularly faces short, urgent costs, that’s often worth it. For a business that rarely needs extra cash, a quick unsecured loan when needed may cost less. Our guide on the cost of waiting for funding helps you weigh it up.
Setting the right limit
A line of credit that’s too small runs out just when you need it, and one that’s too large costs more in fees than it should. A practical way to size it is to look at the biggest short-term gap the business faced in the last year, add a buffer for growth, and use that as a starting point. Review it once a year. If you’re regularly using most of the limit, it may be time to increase it or move part of the balance to a term loan. If you rarely use it, a smaller limit may save on fees.
Who should be able to draw on it?
Decide who in the business can draw on the line and how much without checking with you. Clear rules stop a buffer meant for emergencies being used for everyday spending, and keep the balance coming back down.
Want a limit ready for the next surprise?
Tell us about your cash flow and the size of buffer you’d like. Enquiring doesn’t involve a credit check, and we don’t shop your enquiry around a list of lenders. A real person reads it and calls you to talk through the limit that fits.
Please be accurate on the form about turnover, existing debts and any property, so the limit we suggest is one you can actually get. Start your enquiry.
Frequently asked questions
How is a line of credit different from a loan?
A loan gives you a lump sum that you repay on a schedule. A line of credit gives you a limit you can use as needed, repaying and redrawing as cash flows in and out.
Do I pay anything if I don't use it?
Often a line fee or monthly fee applies to the limit, whether you draw or not. Interest is usually charged only on what you've drawn.
How fast can I draw money?
Once the limit is set up, drawing is usually quick, often same day. Setting up the limit takes longer, so it's best done before an urgent need.
Can I get a line of credit without property?
Yes. Unsecured lines are sized on turnover and bank statements. Property-backed lines can offer larger limits.
What's the main risk?
A balance that never comes down. If the line is permanently drawn, it's acting like a loan with ongoing fees, and a term loan may be cheaper.